Feud over real estate rights heats up

Banks seek property businesses; Realtors play defense

WASHINGTON (MarketWatch) -- In 1999, big U.S. banks won a victory with the passage of the Gramm-Leach-Bliley Act, which allowed them to offer investments, insurance and other products and services for the first time. Seven years later, banks have their sights set on offering one more service: real estate brokerage.

But, in an escalating fight, real-estate brokers are pushing back against banks and urging regulators to throw out a proposed rule that would let banks compete for buying and selling properties.

Real-estate brokers are increasingly edgy about what they perceive as banks' growing powers. And the banks' push to offer brokerage services comes at a prickly time for the realty industry. Online and discount brokers are giving traditional, full-service agents a run for their role as middle-men between property buyers and sellers.

Banks argue that existing law supports their entry into the real estate brokerage and property businesses -- which could represent new and potentially lucrative areas to compete in. Trade groups like the Financial Services Roundtable, which represents banks, say solidifying legal authority for brokerage rights is a legislative priority for 2006.

Banks claim that consumers will enjoy better convenience and lower prices if they're allowed to use banks as real-estate brokers. Real-estate brokers say they welcome competition in the brokerage business but argue banks' federal backing gives them an unfair advantage. They also claim consumers won't save any money using a bank as a broker.

But as the feud continues, some analysts say it could only be a matter of time before banks get into the brokerage business.

"Over time, brokerage is going to be in trouble" from the challenge by banks, says Peter Wallison, who studies financial issues at the American Enterprise Institute.

Slippery slope?

Real-estate brokers have been on the defensive against banks since 2001, when the Treasury and Federal Reserve published a proposal -- still unapproved -- giving banks the green light to operate as brokers.

But now, real-estate agents say, three recent actions by the Comptroller of the Currency have allowed banks to move a step closer to participating in the brokerage business.

Traditionally, laws have barred banks from owning or developing commercial real-estate projects unless the buildings are mostly occupied by their employees. It's part of a longstanding separation between banking and some forms of commerce.

But in December 2005, the comptroller reportedly approved Bank of America's plans to build and own a Ritz Carlton hotel in Charlotte, N.C., where the bank is headquartered. (The comptroller, the arm of the Treasury Department that regulates national banks, doesn't name banks in its decisions.) The bank says its clients and visitors will account for half of the annual hotel occupancy.

That same month, the regulator gave PNC Financial Services Group
PNC, +0.17%
an OK to build and own a $170 million mixed-use building near its Pittsburgh headquarters. PNC employees are expected to only make up 22% of the new office and hotel space.

Finally, the National Association of Realtors is protesting the approval of Union Bank of California's
UB
70% equity investment in a wind energy project.

Though the approvals aren't directly tied to the brokerage business, Realtors suggest the decisions set up a slippery slope toward breaking down barriers between banking and commerce.

"The new rulings represent [the comptroller's] continued efforts to dramatically expand the real estate powers of national banks," National Association of Realtors President Thomas Stevens wrote to Treasury Secretary John Snow on Feb. 7. Treasury should ask the comptroller's office to revisit the rulings, Stevens wrote.

Realtors aren't as concerned about banks' development projects as they are about the brokerage issue. But in a letter to Comptroller of the Currency John Dugan, Stevens said boosting banks' investment powers would increase their risk exposure in the commercial real-estate market and could ultimately undermine the U.S. banking system.

In separate letters to Stevens and Senate Banking Committee Chairman Richard Shelby, R-Ala., the comptroller's office said its approvals were consistent with existing law and that the regulator allowed only limited development projects.

Pro-choice

Banks believe the Gramm-Leach-Bliley Act allows them to enter the real-estate brokerage industry. Based on that law, the Treasury and Federal Reserve published a proposal in 2001 giving banks the green light to operate as brokers. But Congress hasn't OK'd the proposal yet.

Banking advocates say consumers will win if national banks are permitted to act as brokers.

"We believe consumers benefit from more competition in this area," said Floyd Stoner, congressional relations director for the American Bankers Association.

"It is intuitive that more competition brings more choice and lower prices," says Steve Bartlett, president of the Financial Services Roundtable, which represents banks like Bank of America, Fifth Third Bancorp and BB&T Corp.

Irving Daniels, vice president of banking and financial services for the roundtable, says the trade group will spend the spring and summer congressional appropriations season urging "everybody who will listen" in Congress to allow banks to offer brokerage services.

Analysts like Wallison believe banks will eventually be able to persuade Congress that real estate is a financial service. But he acknowledges banks have an uphill fight. "The Realtors are very powerful in Congress," he said. "More powerful than the banks are."

Where bankers see more competition -- and more business for themselves -- Realtors cry foul. They argue the law permits banks to engage in financial activities -- and that real estate isn't one of them.

Ongoing fight

The brokerage issue isn't the only threat Realtors see to their business. NAR is also fighting Wal-Mart's
WMT, -0.37%
application to get a loan-company charter, protesting the move in a Feb. 1 letter to Federal Reserve Chairman Ben Bernanke.

"When commercial firms are allowed to engage in banking, the bank functions under an inherent and irreconcilable conflict of interest," Stevens wrote to Bernanke.

Realtors argue that a giant retailer operating a bank would be another example of mixing banking and commerce -- just like a bank operating property brokerage services. Wal-Mart's application has also met resistance from the banking industry and some members of Congress.

Meanwhile, the fight over brokerage rights is expected to drag on. Realtors are seeking a meeting with Treasury Secretary Snow, but nothing's been scheduled yet, according to a Treasury spokeswoman.

But it's questionable whether Snow could change the comptroller's decisions: the office is under Treasury but is independent.

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